money, inflation & quantity theory
Money functions as a medium of exchange when you ___________.
buy jeans at the mall.
The M2 money supply is defined to include ___________.
currency in circulation, checking accounts, savings accounts, traverlers' checks, and money market accounts
According to the quantity theory of money, ____________.
in the long run, the growth in the money supply is directly related to the inflation rate
This implies that if the money supply grows by 10 percent, then nominal GDP needs to grow by
10%
Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be
11%
According to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 2.3%. The growth rate of nominal GDP is 5.1%. The nominal interest rate is 4.0%. The real interest rate is 1.2%. The money supply (M2) is $10,612 (in billions) According to the quantity theory of money, the growth rate of the money supply must be
4.0 - 1.2 = 2.8 2.8 + 2.3 = 5.1%
According to the quantity theory of money, what is the inflation rate? Use the information given above and calculate the inflation rate. According to the quantity theory of money, the inflation rate is
4.0 - 1.2 = 2.8%
According to the quantity theory of money, inflation is caused by
the money supply growing faster than real GDP
Recall the discussion in the chapter about the "quantity theory of money." The quantity theory of money assumes that ____________.
the ration of money supply to nominal GDP is exactly constant
What are the functions of money in a modern economy? (Check all that apply.)
unit of account, store of value, medium of exchange
Are the predictions of the quantity theory of money borne out by historical data?
yes, the long-run data show a one-for-one growth rate of money supply and inflation
Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to encounter? (Check all that apply.)
It might be difficult to agree on how many car washes is equivalent to painting a house.; It may take a lot of time to negotiate and finally settle on a deal that you both find fair.; You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return.
What is the significance of the real wage as it relates to inflation?
Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.
how does fiat money differ from commodities like gold and silver that were used as money?
fiat money is intrinsically worthless, whereas gold and silver have intrinsic value
If fiat money is intrinsically worthless, then why is it valuable?
fiat money is used as legal tender by government decree and other people will accept it as payment for transactions
The real wage is the ____________.
inflation-adjusted wage
The quantity equation states that the
money supply times the velocity of money equals the price level times real output.
Imagine that the chairperson of the Federal Reserve announced that, as of the following day, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000, etc. Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts. So, if you have $500 in your checking account, as of the following day, your balance would be $5,000, etc. Would you actually be 10 times better off on the day the announcement took effect?
no, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant
Which of the following equations is the equation for velocity in the quantity theory of money?
nominal GDP / money supply
If the growth rate of money supply is larger than the growth rate of real GDP, the inflation rate is
positive
Fiat money is ____________.
something that is used as legal tender by government decree and is not backed by a physical commodity
t follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. In this case, inflation is ____________.
the equal to the gap between the growth rate of money supply and the growth rate of real GDP
According to the quantity theory of money, the inflation rate is
the gap between the growth rate of money supply and the growth rate of real GDP
If the inflation rate is positive, what must be true?
the growth rate of real GDP < the growth rate of money supply
Some barter Web sites allow the use of "barter dollars." The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified above?
Yes, because you could both pay and be paid in "barter dollars."
